BAGHDAD (Reuters) - Fighting erupted in Baghdad's Sadr City overnight after a day's lull, dashing residents' hopes of a let-up in clashes between U.S. and government troops and Shi'ite gunmen who control the streets of the sprawling slum.

Angry mourners carried a coffin containing the body of a man killed in the clashes through the streets. A hospital said seven wounded casualties had arrived overnight. Residents swept out the rubble from freshly damaged buildings.

An explosion in central Baghdad's Tayaran Square killed five people and wounded nine, police said.

Sadr City, home to more than 2 million people, has been the focus of fighting between government and U.S. forces and the masked gunmen loyal to cleric Moqtada al-Sadr who control its streets. The slum is named for Sadr's slain father, a revered cleric, whose supporters now rally around his anti-American son.

After three weeks trapped in the battle zone amid nightly bombardment, residents had hoped for a break in the fighting when the government lifted a vehicle blockade on Saturday. But a relatively quiet Sunday ended with more fighting overnight.

"We heard the sound of bombing and clashes after midnight. It lasted for around an hour and then it stopped. American planes were hovering in the sky until morning," said grocer Ali Sittar.

Construction worker Mohammed Sadeq, 28, said a friend had phoned him to ask for his help fixing a door that was blown off its hinges by the force of a nearby explosion.

The battles with Sadr's followers, which began with a government crackdown in the southern city of Basra in late March, have involved the heaviest fighting in Iraq since the first half of 2007, ending a long trend of declining violence.

The increased violence has made Iraq a central theme of the U.S. presidential campaign again, with Democrats Barack Obama and Hillary Clinton calling for faster troop withdrawals and Republican John McCain arguing current tactics are working.

On Sunday the Iraqi government announced it was firing 1,300 soldiers and police who failed to stand and fight during the campaign in the south, an acknowledgment of failures in an operation and weaknesses in some of its forces.

U.S. commanders have criticized Prime Minister Nuri al-Maliki for rushing into the Basra operation, but they also say it showed the government's willingness to take the initiative against the militias.

Basra has been comparatively quiet over the past two weeks after Sadr ordered his fighters off the streets. On Sunday Iraqi forces conducted house-to-house searches in Basra's Qiblah district, a former militia stronghold, without incident.